Strong Technology and Weak Energy Stocks Help Market Put in Short-term Bottom

NASDAQ TESTING 200-DAY AVERAGE -- GOOD RELATIVE STRENGTH... The market had a good week -- topped off by Thursday's impressive rebound. Yesterday we showed the Nasdaq 100 exceeding its February high and its 200-day average. The Nasdaq Composite Index is still testing those resistance barriers. Chart 1 shows the Nasdaq closing slightly lower today (Friday) after touching its (red) 200-day average and its February highs near 1350. An upside breakout through that level is needed to turn its short-term trend higher. The rising relative strength (under the chart) shows the Nasdaq outperforming the NYSE Index since the start of February. The ratio has already exceeded its November high. It's usually supportive for the rest of the market when the Nasdaq is leading it higher. That's why we believe that an upside breakout in the Nasdaq next week is necessary to continue the oversold rebound that started this week. That would be positive for the Nasdaq and the rest of the market.

Chart 1

ADOBE STANDOUT NASDAQ STOCK... Adobe was Friday's standout performer in the Nasdaq community. The daily chart shows an impressive combination of price and volume action. The software stock gapped to a three-month high on huge volume. A close through its late-November highs would put it at a nine-month high. The weekly chart also looks positive. An upside breakout would push Adobe through a two-year down trendline -- and could pave the way for a move up to the low 40s. Its rising relative strength line is another positive factor.

Chart 2

Chart 3

ENERGY WAS WEAKEST SECTOR FOR WEEK... Another positive development for the stock market was relative weakness in energy stocks (and a big drop in the price of oil). The Oil Service Index failed a challenge of its December high two weeks ago and has been dropping since then. The daily MACD lines turned negative on Monday. The relative strength has also rolled over to the downside -- breaking its seven-week uptrend. While that's bad news for oil traders -- and holders of energy stocks -- it's good news for the rest of the market.
Chart 4

GE HAS A GOOD WEEK -- ABSOLUTELY AND RELATIVELY... Over on the big board, General Electric was a leader on the upside. The stock knifed through its recent high -- and its 50-day average on Thursday on strong volume. It rose again today. GE is now in position to challenge its 200-day average. The daily chart shows that the stock bounced off its October low in mid-February. Its relative strength (vs. the S&P 500) has already exceeded its December high. This may be a good omen for stocks -- since GE is often given "bellwether" status on the NYSE.
Chart 5

NYSE BOUNCES OFF SUPPORT -- SHORT TERM OUTLOOK IMPROVES... On Wednesday, we used the NYSE Composite Index to determine the technical state of the market. We pointed out that it was testing its October low, which could be either good or bad. It was good in the sense that the previous low would be a logical spot for an oversold rebound to start. And it did. The daily chart shows the NYSE testing its (dashed) 20-day average (see blue circle). It needs to clear that initial barrier -- which would signal a move to its upper Bollinger Band just over 4800 (see blue arrow). It may also be a good sign that the two outer bands are starting to diverge. When Bollinger bands converge (see blue boxes) the market enters a low volatility period which usually results in little trend action. When they start to diverge, as they did this week, it often signals the start of a short-term trend. We suspect that will be to the upside. The 28-day stochastic lines have climbed over 20 to the highest level in two months. (We doubled the usual value of 14 to eliminate the recent "noise" in the stochastic lines). Finally, the daily MACD lines have turned positive (but just barely). That increases the odds for more short-term strength. Unfortunately, the weekly and monthly MACD lines are still negative.

Chart 6

"Charts from StockCharts.com

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